Public Bill Committee

[Mr. Joe Benton in the Chair]

Written evidence to be reported to the House

FS 11 Centre for Responsible Credit
FS 12 Mr. Alan Fiber

Clause 11

Rules made by FSA about remuneration

Colin Breed: I beg to move amendment 55, in clause 11, page 8, line 33, at end insert ; and
(c) the regulatory objectives of the Authority..
I welcome you back to the Chair, Mr. Benton, in what is a slightly warmer room than we are used to.
The amendment is small but important.

Mark Hoban: The amendment may be small but important, but is the hon. Gentleman not disappointed, as I am, that it is only because of the presence of him and my hon. Friends that the Committee is quorate this morning?

Colin Breed: I was not going to mention that, but I agree that it is a tad disappointing. No doubt the Minister will rustle up a few more of his colleagues in the next few minutes. Otherwise I might sit down and ask for a vote. That would be a more difficult thing.
This is a probing amendment. I want the Minister to explain why we have omitted a particular aspect in the clause. To subsection (3)
The rules must secure that any remuneration policy that an authorised person is required by the rules to have is consistent with
I seek to add the words:
the regulatory objectives of the Authority.
That is one of the key aspects. If we have learned anything from the recent past about the way in which remuneration or compensation packages have operated, it is that they have in many respects driven business both corporately and individually to extremes, causing some of the problems that we have seen. In its monitoring and supervisory role in the past, the FSA might have had a passing glance at the compensation packages or the recommendations of remuneration committees in the individual institutions that it was looking at. It obviously did not get too involved in them, and yet it was a strong driver for the way in which those institutions operated.
Monitoring the performance of banks and other lending institutions must include the fact that the FSA will need to ensure that the remuneration packages, particularly bonuses and such, align with the model that the bank or the institution is undertaking. That is an important role for the FSA. It should have an impact on compensation packages. It should be able to make regulatory rules in respect of the operation of banks and others, which include remuneration and compensation packages. In many respects, the additional measure ought to be the first one, not the third one. The rules of remuneration committees, the impact of their decisions and the way in which bonus contractual arrangements are made are extremely important. The FSA should not only be able to comment but be able to ensure that such packages are commensurate with the appropriate business model that it is monitoring. That it should have at least a role to play when the remuneration rules are set up is a pretty reasonable addition to the subsection.
As I said to the Minister, it is a probing amendment. I am sure there are other ways to do this, but I want to be certain that the way in which the FSA is involved in how banks and others construct performance-related and profit bonuses is appropriate. We have seen much inappropriate use of the bonus systems. I have just come from the Treasury Committee, which is meeting at this very moment; that is perhaps why slightly fewer hon. Members are in Committee. It has been receiving evidence from Mr. Stephen Hester, and already much of this mornings discussion has related to bonus payments, the packages that were put together at ABN and the contractual package that was offered to Mr. Hester when he took his current job.
As for the likely bonus pot and the distribution of bonuses this year, it has been demonstrated clearly that they will be significant, particularly in respect of the performance of individual banks during last years trading. The addition to the clause would be an important way in which the FSA could not only monitor, but ensure that future compensation packages are allied to a sustainable business model that will not lead us into the problems that we have experienced in the past.

Ian Pearson: For the record, the Government Benches were reinforced by 10.33 am, after only three minutes of our debate, despite the fact that several colleagues are performing sterling work on the Treasury Committee.
I wish to explain to the Committee why the amendment tabled by the hon. Member for South-East Cornwall is neither necessary nor particularly helpful. As he will be aware, clause 11 places a duty on the Financial Services Authority to make rules setting out the standards to which remuneration policies should adhere, in pursuit of the clear and specific objectives that remuneration policies in banks should not incentivise excessive risk taking, and that regulatory action should be appropriate to ensure that that does not happen. That stems from an established international consensus among the G20 and the Financial Stability Board that remuneration policies in the financial services sector should be subject to control to ensure the avoidance of excessive risk, and we agree strongly with that position.
Clause 11 therefore makes express statutory provision for the implementation of the consensus by placing a duty on the FSA to make the appropriate rules. We need to be clear that the rules will be focused on the vital objective of ensuring that remuneration does not encourage excessive risk taking by key employees of banks. The amendment proposes something different from that, and would add to subjection (3) of proposed new section 139A the additional requirement that the rules that the FSA makes must ensure that remuneration policies are consistent with all the statutory objectives of the authority.
I must say to the hon. Gentleman that requiring the FSA to insist that authorised persons have remuneration policies consistent with a large number of objectives would be difficult from a practical perspective, both for the firms and for the regulator. The rules would need to be extremely detailed and wide-ranging to achieve that. The amendment is therefore likely to detract from the focus of ensuring that remuneration does not incentivise excessive risk taking. It would certainly have the effect of moving the United Kingdom policy on remuneration in a different direction.
A balance must be struck between regulation by public authorities and self-regulation imposed through the normal operation of market discipline. That is very much a live issue at the moment. To say that remuneration policies must be consistent with all the objectives of the authority, including consumer protection, market confidence, tackling financial crime and so on, is not really necessary. The FSA already pursues those objectives through the full suite of available regulatory and enforcement powers. It is not clear that adding an express duty for it to do so through its regulation of remuneration policies would add anything.
Requiring the FSA to subject a limited category of authorised persons to the FSAs objectives in a small part of their activities would do little to assist consumers or ensure that the FSAs other objectives were fulfilled. As I have said, the FSA has a full suite of other powers available to it in other areas, and there is a real risk that, if the amendment were accepted, it would detract from the purpose of the provisions and from what we are proposing, which is deliberately focused on avoiding excessive risk taking. I therefore urge the hon. Gentleman to withdraw his amendment.

Colin Breed: The truth of the matter is that banks and financial institutions are different if they are too important to fail, because taxpayers are standing behind them. We know that failure, or the potential to fail, has perhaps been driven as much by remuneration policies as anything else.
I understand it when the Minister says that the measure would have to be detailed, and in general terms we do not want to interfere in the remuneration policies of private companies or get too fixated by the current situation, when there is large taxpayer ownership of a couple of large institutions. Hopefully, this legislation will endure beyond that situation, so we can talk about a more normal situation. Nevertheless, the FSA requires the explicit authority and power to intervene in a remuneration policy.
Will the clause, as it stands without the amendment, allow the FSA to veto or not authorise an institutions proposed remuneration package or bonus payment system if it feels that the package is not in the institutions best interests, or because of the systemic risk that would arise if the institution failed as a result of that remuneration package? If the Minister is able to satisfy me that that is the case, and that we do not need to concern ourselves with the issue, I am perfectly happy for the clause to remain as it is. As far as I am concerned, the key aspect is that the FSA should have the ability, if required, to say to a large bank, We do not believe that your bonus payment system should be used, given your performance, the business model and the potential systemic risk that would arise if you entered into a difficulty. We therefore say that you cannot use it.

Ian Pearson: I am happy to confirm that the focus in clause 11 on avoiding excessive risk taking does exactly what the hon. Gentleman suggests. The FSA also has other powers in other areas to ensure that its other objectives are fulfilled. That is why we do not believe that the powers should be widened in the way that he suggests.

Colin Breed: I think that the Minister is being entirely frank. Our concern was about whether the FSA has that ability. It has had a number of powers for many years that it has failed to use. Perhaps in this particular case, it will focus clearly on its ability to use the clause to ensure that it acts swiftly in future if it becomes concerned, as a result of its supervisory activities, that a remuneration package or bonus payment system may drive an institution in the wrong direction. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mark Hoban: I beg to move amendment 54, in clause 11, page 9, line 11, after void, insert
where that agreement was signed after 19 November 2009..

Joe Benton: With this it will be convenient to discuss Government amendment 56.

Mark Hoban: Thank you, Mr. Benton. It is a pleasure to serve under your chairmanship this morning. I am pleased to see that although I have blazed a trail with my amendment to proposed new subsection 9, the Minister has ridden in behind and has come up with something else, which may well be the amendment that changes the Bill. I would perhaps take some credit for poking in the right direction, but his amendment gives rise to questions about what it means in practice.
I want to start with some brief remarks on the clause. One of the big debates that has emerged from the financial crisis is about remuneration. There are two strands in that debate. The hon. Member for South-East Cornwall just alluded to one of them, which arose from the questioning of Stephen Hester by the Treasury Committee on quantum and the amount of money involved. It plays into the question of why banks can make such large bonus payments, given that the taxpayer bailed them out. That has rightly triggered fierce debate about that aspect of remuneration.
AlsoI shall spend a bit more time discussing thisattention has focused on what the right remuneration structures are for banks. Clause 11 provides the FSA with a framework for introducing rules to that effect. In his report on the FSAs role in the financial crisis, Lord Turner said that
within firms, little attention was paid to the implications of incentive structures for risk taking, as against the implications for firm competitiveness in the labour market and for firm profitability. In retrospect this lack of focus, by both firms and regulators, was a mistake. There is a strong prima facie case that inappropriate incentive structures played a role in encouraging behaviour which contributed to the financial crisis.
In September, Lord Turner said that
the honest truth is that bad remuneration policies, though relevant, were far less important in the unravelling of the crisis than hopelessly inadequate capital requirements against risky trading strategies.
The point is that although there is much debate about bonuses, correlating bonus structures to risk and shareholders interests is not sufficient in itself to prevent or mitigate the recurrence of a financial crisis. It is a helpful factor, but it is not the silver bullet that people are looking for.
Clause 11 amends the Financial Services and Markets Act 2000 to create new rules about remuneration policy at any and all FSA-regulated firms, not just banks, although that is clearly the principal focus at the moment. Proposed new section 139A(1) says:
The Authority must exercise its power to make general rules so as to make rules requiring each authorised person (or each authorised person of a specified description) to have, and act in accordance with, a remuneration policy.
Section 139A(3) goes on to say that
any remuneration policy that an authorised person is required by the rules to have
must be
consistent with
(a) the effective management of risks,
which is not defined, and
(b) the Implementation Standards.
The implementation standards are in a paper published by the Financial Stability Board in September 2009 setting out how an earlier policy statement, produced by the Financial Stability Forum in April last year, could be implemented.
Will the Minister clarify one point? The FSAs code of remuneration policy was published the previous month, in August last year. It is not clear from the Bill whether general rules refers to the FSAs August 2009 statement, which predates the implementation standards, or whether, as I think is the intention, more detailed rules will be produced by the FSA to flesh out what was in the code. It is clear from the FSA code produced in August and the implementation standards that the latter, although relatively permissive, are much more specificfor example, on the proportion of a bonus to be deferredthan the FSAs code, which is more general. Will he explain the interaction between those two documents?
In looking at the FSBs work programme, a further report on compensation practices will be published in March 2010. It will look at how the implementation standards were implemented across different jurisdictions. I assume that if the March 2010 document argues for a further tightening of the rules, it can be reflected in the FSAs policies and rules by virtue of subsection (4) of new section 139A, which says:
When making rules about remuneration policies, the Authority must have regard to any other international standards about the remuneration of individuals working in the financial sector.
It is clear that work is ongoing. There is not a final international position on this. Further guidance may be issued on the back of the report planned for March. Although the clause is anchored off the back of the FSBs September 2009 document, I assume that any later documents will also be covered by this.
The changing picture gives rise to my and the Ministers amendment to subsection (9), which gives the FSA the power to make rules that may
prohibit persons...from being remunerated in a specified way.
It may provide that
any provision of an agreement that contravenes such a prohibition is void.
When the Minister and I debated the Banking Act 2009, we spoke briefly about the potential power in that Act to tear up directors contracts. The Minister was very clear that the power was not there for that purpose, and directors contracts would continue in place. It was not clear from the way in which subsection (9) was drafted whether agreement, which pre-dated the publication of the Bill, could be made void, and what protection there was for pre-existing contracts of employment between financial institutions and their employees. Amendment 54 therefore seeks to clarify any contracts entered into prior to 19 November. Hon. Members might wonder why I chose 19 November. That was the date that the Bill was printed. People will know that if their contracts were entered into prior to 19 November, they would not be capable of being made void. However, if the contracts made after 19 November were in breach of international standards, they could be made void. People were given notice at that point about the principles with which the remuneration policy should comply. That is the purpose of my amendment.
Government amendment 56, which applies when the rules are made, is perhaps more generous than mine. It is not clear to me whether the code that the FSA incorporates as part of its rules in August is the same as the rules for this purpose, or whether there is a further set of detailed rules that people would be expected to comply with. Does the code have the same standing as a later set of rules? I am not clear what rules the Minister refers to. Is it the code that was published in August or will more detailed rules be published at a later date, with which people will be expected to comply? Are the contracts that pre-dated those rules still valid? I would like the Minister to clarify that.

Ian Pearson: First, in response to the more general points made by the hon. Member for Fareham about the clause, the moving picture of regulation and the further development of international standards, I must say that the current FSA code is a world-leading example of how a supervisor should tackle remuneration that incentivises excessive risk taking. Under the Bill, we are strengthening the FSAs hands as a regulator to take action against remuneration policies that encourage excessive risk taking and ensuring greater accountability of the FSA to the Government in that area. The hon. Gentleman is right about further international developments. He referred to the work of the Financial Stability Board; it is a matter on which discussions are still taking place. As a result, the FSA will be changing its code to ensure consistency with the G20 agreement. The plan is that it will review its code in 2010 to take account of experience gained in implementing it, and in the light of international developments, which is something that the hon. Gentleman will want to support.
With regard to amendment 54 and Government amendment 56, I recognise that there has been some confusion over the impact and powers given to the FSA under the clause, but I assure the Committee that it was never the Governments intention that the power should be used by the FSA to invalidate provisions in existing contracts, nor does the clause include a provision giving the FSA retrospective powers. As the Committee is aware, the Joint Committee on Human Rights recently recommended that the lack of retrospective effect should be made clear in the Bill, and the hon. Gentleman has made a noble attempt to do that with the amendment.
However, the specific wording of the hon. Gentlemans amendment refers to the date on which the Bill was introduced to Parliament and does not fully address the concerns that have been raised. Any rules that the FSA makes and publishes will, of course, be known after that date so amendment 54 would allow some retroactivity by referring to the date when the Bill was introduced into Parliament rather than the date on which the FSA made its rules.
In contrast, Government amendment 56 provides that any rules the FSA makes about remuneration may not render void a provision that was already in an agreement when that rule was made. The hon. Gentleman raised a broader issue and one that we think is appropriate. He asked whether the code was equivalent to rules for the purpose of voiding any contracts. The answer is no. The rules themselves must provide that continuation of a rule will make a clause void. The code does not, and there will be new rules.

Mark Hoban: The code is now part of the FSA rulebook, so I am not sure why it is not regarded as rules for the purpose of the clause.

Ian Pearson: I accept that the hon. Gentleman is right. I am right, too, given my advice, but if I can provide further clarification during this mornings debate, I shall certainly do so. The key point is that the Government amendment is broader and more appropriate than amendment 54, and I shall clarify the detail with him shortly.

Mark Hoban: I am not quite sure what it is we are broader or more conciliatory to the banking sector about, but there is a problem because we need clarity for contractual purposes. There is also tension because the code, which was introduced in August, is less specific than the implementation standards. For example, the standards define some proportions of remuneration that should be deferred, whereas the code is much more permissive. Greater clarity on that matter would be welcome. If the formulation of the Bill is not sufficiently clear, once the Government amendment is madeassuming that the Committee passes itwill the Government return to the matter on Report? That would ensure that what people are meant to be complying with is crystal clear. People are making formal commitments; for example, the banks have signed up to the Pittsburgh declaration. Many commitments have been made, and we must ensure that we respect contractual obligations. Therefore there needs to be some clarity as to what it is that people are meant to be complying with and what the rules are.
Ian Pearsonindicated assent.

Mark Hoban: The Minister nods in assent, so I assume that he will look into that matter again and perhaps table amendments on Report. With his reassurances and explanation on why amendment 56 is superior to 54, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment made: 56, in clause 11, page 9, line 17, at end insert
( ) A provision that, at the time the rules are made, is contained in an agreement made before that time may not be rendered void under subsection (9)(b) unless it is subsequently amended so as to contravene a prohibition under subsection (9)(a).. (Ian Pearson.)

This amendment makes it clear that the general rules about remuneration may not render void any provision which is already in an agreement when the rules are made (so long as the provision is not subsequently amended in a way that contravenes the rules).

Clause 11, as amended, ordered to stand part of the Bill.

Clause 12

Rules made by FSA about recovery and resolution plans

Rob Marris: I beg to move amendment 57, in clause 12, page 11, line 5, at end insert
or requiring the authorised person to be broken up into several persons by a date specified by the Authority..
It is a pleasure to appear before you again, Mr. Benton. Part of the Bill addresses the world recession and its effects in the UK, and the regulatory regime in the UK faced with a world crisis. My starting point in tabling the amendment is that there will be another crisis in world banking, which will be reflected in the UK. I am not foolish enough to predict when that crisis will be, but as someone whose partial background is as a historian, it is clear from looking at the past and the nature of capitalism, driven by greed and innovation, and its cyclical nature, whether one takes Kondratiev long waves or shorter ones, the high likelihood is that at some point in western capitalism within the next 30 years there will be some kind of banking crisis.
The Bill goes some way towards addressing such issues for the future, including the recovery and resolution plans in clause 12, and the amendment relates to resolution plans. Paragraph 106 of the explanatory notes, states:
A recovery plan aims to reduce the likelihood of failure of a firm by setting out what the authorised person would do in, or prior to it becoming subject to, stressed circumstances.
It continues:
Action described in the plan may include the restructuring, scaling back or sale of certain business lines or assets of the authorised person in question.
A resolution plan, in contradistinction to a recovery plan, is to do with failure. Paragraph 111 of the explanatory notes, states that it is
action to be taken in the event of failure of all or any part of the business occurring, and action to be taken by a firm where failure is likely.
Paragraph 110 also states that resolution plans allow for
gradual implementation, focusing on the largest, most complex and systemically significant firms in the first instance.
Proposed new subsection 139C(8), which my amendment would change, states:
The steps that the Authority may take include requiring the resolution plan to be revised.
My amendment would add after to be revised:
or requiring the authorised person to be broken up into several persons by a date specified by the Authority.
It is about the break-up of big banks. As drafted, the Bill says that if the authority does not like a resolution plana plan that is to do with failure or its likelihoodit can ask for it to be revised. Well, whoopee-doo. We could have a big bank failing and the FSA saying, You had better revise your failure plan, or the resolution plan, as it is called in the Bill. That is not adequate. The size of our financial institutions in the United Kingdom is the elephant in the roomto use a hackneyed phrasein the Bill. They are too big. They need to be broken up. To use the description of the Governor of the Bank of England when he spoke in the Lords in December, banks and financial institutions are too important to fail.
I have a lot of time for the Governor of the Bank of England because he is, as my hon. Friend the Minister will know, a fellow Wulfruniana Wolverhampton native. For some strange reason, he does not support Wolverhampton Wanderers football club; he supports Aston Villa. Apart from that, Mervyn King is not a bad Wulfruniannot a bad bloke. He raised the issue of financial institutions in our country that are too important to fail.
My amendment is permissive. It would say:
The steps that the Authority may take include...requiring the authorised person to be broken up
the authority may take is permissive. The amendment does not seek to break up big financial institutions in the United Kingdomat the moment. If a Government had such a powerlet alone used itthere is a risk that certain financial institutions would decide to leave the United Kingdom, because of such draconian powers. That is a concern. There is also the issue of breaking up large financial institutionsbanksinto retail and investment, or, as the Americans call them, utility and casino banks. That has been canvassed by the hon. Member for Twickenham, who is a member of the Committee but has not yet joined us. Breaking up banks in such a way is simplistic. Hon. members will know my concerns about UK banking in contradistinction to Canadian banks, which are the most stable in the world. They were voted the most stable by the World Economic Forum. They are some of the biggest banks in the world and they do retail and investment, so that is not necessarily the way to break up big financial institutions. Although it would be worth looking at, that alone will not solve it.

Andrew Love: I am following my hon. Friends argument closely. A concern raised by his amendment is that it places the breaking up of organisations in the Bill. Yet, as I understand it, the stated intent of the Bill is to set a framework and leave it to the living wills to decide policy. What arguments does he deploy to support putting it in the Bill, when the suggestion is that it be left to the discussions between the FSA and the financial organisation itself?

Rob Marris: My amendment is permissive. It does not say that big financial institutions should or must be broken up. It says that the Financial Services Authority may, if there is not an adequate resolution plan, order that a financial institution be broken up. It is merely permissive in that sense. If it were to lead to an exodus of financial institutions from the United Kingdom, I am not sure that would be a bad thing. It would be a bad thing for people who work for them, of course. However, we are faced with the fact that, in our country at the moment, we have spent a huge amount of taxpayers moneysome of which we might get back, some of which we might notbailing out failed large financial institutions. We cannot afford to keep doing that. This year, the Governments borrowing is about £175 billion; it will be of a similar order next year. That is the result of two things: one is the bailing out of financial institutions and the second is that the world recession and the recession in our economy, the effects of which the Government have done very well to lessen, have been hugely costly. The antics of morally corrupt people such as Sir Fred Goodwin or Adam Applegarth of Northern Rock have destabilised our whole system here and similarly across the Atlantic in the United States of America, and the cupboard is bare.
If a big financial institution in the United Kingdom were to go bust in the relatively near future, the taxpayer could not afford to bail it out. To me, it is not a choice between, Ah well, do we take on a bit more debt in the future to bail out a big financial institution if it goes bust? or Do we break it up in the future?, but a matter of, We cant afford to bail out big time somebody in the future, so lets take some preventive steps now, at least by giving the FSA the power to do it. I am not saying that it must do so, but just that we should take some preventive steps now to consider breaking up the large financial institutions, as the amendment suggests, because we cannot afford the alternative.
As politicians who are considering the Financial Services Bill and members of society, we need to debate whether the size of the financial institutions relative to the size of our economy is, in fact, too big. I am sure that some hon. Members will agree that at some time in the unspecified future we will again have a financial crisis in the United Kingdom. That is what happens with big financial institutions because capitalism driven by greed and innovation can produce negative as well as beneficial results. If we are to have such a crisis in the future, let us take preventive measures now. Let us talk about it now.
For example, as many of my colleagues on the Government Benches will know, for trade union activists the time to discuss a redundancy policy of the company for which they are working is not when the company is proposing to take redundancies, but when it is not proposing to take redundancies, because that is when a calm debate can take place. At the moment, the signs are that the Governments heroic actions have stabilised the financial system both in the United Kingdom and more broadly throughout the world, and that things are starting to calm down. So now is the time when we should debate the size of financial institutions in our country and whether there should be a cap on their size, such as on their capitalisation as a percentage of gross domestic product or some such formula. I am not fixed about what. The issue is one on which economists are fairly evenly divided, but there is a big school of thought in the western world among economists that the too important to fail issue is being ignored by politicians.

[Mr. Roger Gale in the Chair]
I certainly pick up in the United Kingdom that, as politicians, we are failing in the debate. We are not having it. It takes a Back-Bench amendment to enable such a debate, and I should be interested to hear what my hon. Friend the Ministeralso from the west midlandssays about whether the FSA should have permissive powers. Do the Government propose to have a public or political debate about whether the size of financial institutions in the United Kingdom needs to be cut and, if not, why do they not consider that we should have that debate? If the Ministeras I anticipate he mightsays that the amendment is not right, does he think that a different change to the Bill would be appropriate to implement such a power so that its use can be discussed now while matters are calming down? We cannot avoid such a debate; we either have it now or whoever of us is left standing, as it were, when the next crisis hits and we cannot afford to bail out big institutions, will have to discuss the matter then. I would rather have the debate now.

Mark Hoban: I welcome you to the chairmanship of the Committee, Mr. Gale.
The hon. Member for Wolverhampton, South-West raised some interesting points in his amendment. I was going to touch on something similar in the stand part debate, and if I may, I would like to make some broader comments about clause 12.
The debate is an important one to have. The hon. Gentleman has done us a service by raising the issues, including the one about banks that are too big to fail, and whether there should be a division between different elements of banking activitythe shorthand is: do we need a British Glass-Steagall? In our white paper on reforming financial regulation we said that there was a strong case for dividing up those activities for a range of reasons. However, we feel that the best way to do so is not by unilateral action, but by international consensus.
Meanwhile, there are measures that we can take to improve regulation to try to tackle some of the issues that have emerged from the size and complexity of such institutions. There are ways in which we are able to impose a higher capital requirement for larger banks, which provides a bigger buffer if they suffer losses and changes the economics of a large bank. If we ensure that there is a closer correlation between the capital requirements and the level of risk that people undertake, we may see a separation of utility-type functions from higher-risk activity.
Technically, I think the hon. Gentlemans amendment may be deficient, which is a rare statement for me to makethat is a phrase that the hon. Gentleman uses quite often to talk about me. I am not sure that his amendment delivers what he seeks, as the case may be that a group can have a number of authorised persons, and he would not deliver his outcome of a break-up of banksthey would just have more authorised persons within a group. However, I do not wish to be pedantic.
The hon. Gentlemans amendment illustrates one of the challenges that we saw with Lehman Brothers, which is that a single institution can be very complex, and very difficult to wind up. One will then force a position either to rescue that institution or let it fail. We saw the consequences of allowing Lehman to fail. It triggered a fresh wave of uncertainty in the market and led to a further set of actions to stabilise the banking system. Also, the administration of Lehman Brothers operation in the UK will, I suspect, be one of the most expensive administration processes, because of the complexity of the records, the fact that trading on Lehmans own account was on the same ledger as Lehmans trading for its clients, and because there were no rules or plan in place to wind up the business in an orderly fashion. I know that the Financial Services Secretary has announced some progress on that.
There are complex issues that we need to think about; we are talking about complicated operations. The hon. Gentleman suggests that we might break up authorised person into several persons. There are many different ways in which banks can structure their operations. Some could be heavily subsidiarised, with different activities in different subsidiaries. Others could have all their operations within one subsidiary. What would happen if there was proprietary trading, commercial lending and retail deposits in one institution? There are arrangements in place to protect retail deposits, but it may be difficult to segregate those activities and save them separately from the rest of the banking activity. That is why it is important that we look at the plans set out in clause 12.
The Governor of the Bank of England said in October that
both the structure and regulation of banking in the UK need reform. Banks increased both the size and leverage of their balance sheets to levels that threatened stability of the system as a whole. They remain extraordinarily dependent on the public sector for support. That was necessary in the immediate crisis, but is not sustainable
in the long term. There are many different regulatory responses that we can take, and one of them is to have living willsthe resolution and recovery plans that clause 12 allows.
Andrew Bailey, the chief cashier at the Bank of England, talked about the range of responses that there could be to complex institutions, and he identified three elements: regulation, structure and resolution. The recovery and resolution plans fall within the resolution strand of his thought. There is widespread international agreement. We talked about living wills and the need for them in our white paper in July 2009. There is work going on internationally on how they might work in practice. The FSA has summarised some of the issues in an appendix to its discussion paper on the Turner review.
Let me give some detail on what the plans could entail. The recovery plan should include: detailed plans of the businesses and subsidiaries that could be sold to third parties in any contingencies; the extent to which the business could be de-risked in a relatively short space of time; and the ability to withstand the failure of the largest counterparties. How do they safeguard themselves against contagion? One of the untold stories about Lehman Brothers is that its collapse did not lead to the widespread contagion and the lock-down in markets that people might have expected. Recovery is about a business sorting itself out and moving to a more stable position.
The resolution plans tie into the special resolution regime set up at the time of the Banking Act 2009, and they mesh into the responsibilities that the Bank of England and others have as a consequence of that regime. That relates to issues such as liquidation, transferring deposits, introducing a bridge bank, placing banks into temporary public ownership and deposit protection. However, the plans are at an early stage, and there are issues that I want to raise with the Minister.
The discussion paper published last year refers to a pilot project that began at the end of 2009, in which a small number of banks will produce draft resolution plans. Can the Minister confirm that the pilot is under way? Can he tell the Committee which banks are taking part? Pilots are important because they determine the type of information that we need in the plans. We do not know what sort of information will be required. The Bill is drafted broadly to ensure that the FSA has the power to collect the sort of information required. Until we know the outcome of the pilot, it is difficult to know precisely what will be required, what the cost of the plans will be and how much information will be needed. Also, what will the institutions have to do as a consequence of the plans?
That goes back to a slightly different approach to that taken in the amendment tabled by the hon. Member for Wolverhampton, South-West. Some institutions have raised the question of whether the plans will force them to subsidiarise if they are operating as a single entity. Although the hon. Gentlemans permissive amendment would make that option specific, there are questions. An institution might ask, Will one of the outcomes of my discussion with the FSA about my plan be a requirement for me to separate out the activities of different subsidiaries and to undo some of the group structures that are in place? That is a valid question.
One issue that flows from the pilotthis is not addressed in the impact assessment, because we are at an early stageis the cost of the plans. How voluminous will they be? What will be the level of detail? How expensive will it be not only to draw them up initially but to keep them up to date? There is a potentially significant cost that we need to bear in mind. That affects the competitiveness of banks based in the UK, compared to others in the global market. That is why it is important to think about the international context.
Work is being done internationally to develop the plans, but will the UK lead the way in their implementation? Have we specifically thought through the costs and benefits of that? It is worth pointing out that principle 8 in the Financial Stability Forums work on cross-border co-operation and crisis management says:
authorities will strongly encourage firms to maintain contingency plans and procedures for use in a wind down situation...and regularly review them to ensure that they remain accurate and adequate.
The first words in that quotation are authorities will strongly encourage, but the UK is mandating the preparation of such plans through the clause. There is concern that the UK is moving faster than other jurisdictions and about whether that is appropriate. The British Bankers Association has said:
It is a matter for concern that the FSA is being placed under a statutory duty to make rules for the production of recovery and resolution plans without there first being agreement on the fundamental objectives behind the initiative. These statutory provisions would front run international agreement on the need for, and contents of, RRPs.
In its response to the Committees debate, the CBI, which supports living wills in principle, has said:
this clause must be consistent with any international agreement otherwise this clause should be removed from the face of the Bill before it receives Royal Assent. Additionally the CBI does not believe that legislation is required for the FSA to implement these new requirements at the appropriate time.
Can the Minister give some assurances about the pace of development of such things internationally and about how we are ensuring that the FSA remains in step with international agreements?
We have talked about the coverage of the plans in the context of banks, and the hon. Member for Wolverhampton, South-West, spoke about them in the context of bank break-ups. However, clause 12 is not limited to banks, or even deposit takers. The clause gives the FSA the
power to make general rules so as to make rules requiring each authorised person (or each authorised person of a specified description) to prepare, and keep up-to-date, a recovery plan.
Although we have been talking about plans in the context of banks, the provisions could apply to insurers, asset managers, hedge funds, independent financial advisers and the insurance brokers on the high streets in our constituencies. Everyone could be required to have a recovery and resolution plan; there is no barrier in the Bill restricting them purely to banks. I am sure that that is a conscious decision, but we need to understand whether this is the first stage in a process that will require all institutions to have recovery and resolution plans, or whether the intention is simply to restrict them to banks and licensed deposit takers. Clearly, institutions other than banks, such as building societies and credit unions, hold customers money, and the special resolution regime also applies to them. It would be helpful to have some clarity on that.
The key issues are uncertainty about what the plans will include, the fact that the FSA appears to be in the leadthat is not necessarily a bad thing, but we need to understand the balance of the risksand what sectors will need to have resolution and recovery plans.

Roger Gale: Order. Before we proceed, it will not have escaped the notice of the Committee that we have just embarked on a clause stand part debate. The rule is that we can have only one, so we are now entertaining the amendment that has been moved and a clause stand part debate. There will be no separate clause stand part debate on the clause.
There is another point that I would like to make. Before I came to Committee from an Adjournment debate in which I had participated, I received a call from the office of the Chairman of Ways and Means, indicating that there has been a request for a meeting of the Programming Sub-Committee to be held at 1.30 pm. I have agreed to chair it, if it is held. I say to the Committeeand the usual channels, who are presentthat if we are going to hold that meeting, it might make sense to do so at 1 oclock, immediately after this sitting, rather than at 1.30 pm, but I will endeavour to assist, whichever is more convenient to those involved.

Colin Breed: I will include my remarks on clause stand part in the discussion of the amendment. I understand the reasons why it has been tabled. It has helped us to raise the issue, which has to be tackled at some time or another, as the hon. Member for Wolverhampton, South-West said. However, I do not think that that should be done, for a variety of reasons, either in this Committee or in the timing, because international co-operation is vital. Nevertheless, it is quite right that the big question is whether we can afford to have very large banks attached to medium-sized countries, with all the associated risksof course, we know what has happened in Iceland and elsewhereand the issue needs to be tackled. I do not think that the difficulties will come down the line to us as quickly as the hon. Gentleman suggested. Nevertheless, that big issue has to be tackled.
I have been rather lukewarm to recovery and resolution plans in clause 12. I am not certain how they will operate, what their effect will be on competition, what the overall costs will be and what value they will have. Often, unexpected and unforeseenalmost impossible to anticipateevents can cause a catastrophe.
All the pre-planning in the world and all the recovery and resolution plans that may be put in place may simply not be able to anticipate exactly what will befall this sector or, indeed, any other sector. We all know that risk plans are almost part of the daily life of practically everything nowin education, science and the police force, for example, we have to make risk assessments, but too often, the assessment as perceived does not cover the precise problem that sometimes arises.
I think that the whole object is the same. We are going to look through general rules at some stage, and that is the interesting part. I look at this in terms of macro and micro. In a macro sense, when we talk about Glass-Steagall, splitting up investment banks and narrowing banking, such macro-type decisions must, by necessity, include a considerable amount of international co- operation. Questions such as how to split up large groups and how to compartmentalise parts of international businesses in those large groups are difficult to answer. Indeed, they will be subject to different regimes, different legal systems and interpretations and different capital requirements. That will be a difficult aspect.
The simplicity that has been referred to and sometimes accepted by my hon. Friend the Member for Twickenham does not take into account the fact that, when Glass-Steagall was set up, the banking system was wholly different from what it is today. The sheer complexities, internationalisation, interconnectivity and scale are of a significantly different proportion. Therefore, some sort of beefed-up Glass-Steagall is not appropriatewe have to look at it completely differently. However, I understand the context of trying to reduce businesses to a size where they can be properly regulated and where they would not cause a systemic risk, which is likely if they are too important to fail.
There is also is the micro part, on which we should concentrate more when talking about recovery and resolution plans. Even in the domestic sense, if we ignore the international parts of large banking groups, there is a major complexity in the interconnectivity of subsidiaries and subsidiaries of subsidiaries. We know that from our evidence session in the Treasury Committee not that long ago, when we invited the chief auditor of a large firm of accountants to explain the domestic arrangements of the various companies within the HSBC group. He was completely unable to do so. That a chief auditor cannot explain the interconnectivity, where the notes to accounts now occupy some 60 pages, as opposed to the accounts themselves occupying about six pages, demonstrates that the real complexity is such that perhaps that in itself needs to be tackled to reduce the whole subsidiary complexity.
Such a system is often used to minimise tax, not to avoid or evade it, and to create a suite of companies capable of assisting the banks and their clients to implement ever-increasingly complex transactions between a variety of the subsidiaries. That ultimately means a significant reduction to the taxman.
Identifying such structures and creating simpler ones could be part of the resolution and recovery plans, so that even understanding the way in which the huge groups have been put together would be more helpful in identifying early the problems that will arise. Such action might even help to refuse certain acquisitions or mergers in the terms in which they are envisaged. Companies are sometimes brought into a group in ways that do not assist the understanding of the relationship between each part of the group. In the micro sensethe domestic sensesome work can be done, which will be helpful, but in the macro sense, it is a more difficult area.
The other aspect that I am worried about is keeping things up to date. We know that keeping things up to date is a constant problem. Yesterday, I was part of the tax law rewrite Bill, a 10-year project to rewrite something that made very little difference to the amount of revenue that we received. Goodness knows how much 10 years of rewriting and updating things costs, but let us imagine the costs of rewriting and updating resolution and recovery plans to respond to the Finance Bill each year and the way in which the legal framework of other countries had undertaken mergers, acquisitions or even sales of businesses. That could be a never-ending process, like the tax law rewrite Bill and become an extraordinary cost to individuals. I just wonder whether we will receive value for the money that will be expended.
In respect of competition and innovation, we do not want to create a homogeneous system, whereby we just have shades of a certain business in different financial groups and there is little to choose between products and how they operate. They are so constricted in the way in which they have to respond to recovery and resolution plans that it does not give them the element of innovation or competition that we want. I have some general concerns such as that, but the clause is right overall. The rules that will result after discussions with the Treasury and the Bank of England will be a key part, and perhaps at that stage and when the international scene is a little clearer, the more macro aspects of the matter could be considered. However, although I cannot support the amendment, it has enabled a valuable contribution to be made to the debate.

John Howell: I, too, thank the hon. Member for Wolverhampton, South-West for tabling the amendment, which exposes one of the great weaknesses of the clause and, indeed, the Bill. The Minister has said on a number of occasions that the Bill will set up various frameworks, but the difficulty is that those frameworks must be so wide because all the retrofitting, whether against international agreements or against the detailed regulations about how the living wills will work, must be done later.
The problem with such frameworks is that anything can be put into them, and there is no clarity about what is going into them at the moment. I understand fully why the hon. Gentleman wishes to bring more clarity to the Bill. In that general aim, he has a large amount of support. However, some practical issues relating to the break-up of corporate structures have been mentioned. Clearly, that was in the Ministers mind during the evidence session.
The Minister said that the living wills would be a last resort, but he went on to describe them, colourfully, as a manual for surgery. Surgery involves cutting bits out, rather than patching things up. Medicine is patching things up and making the patient better; surgery is the fun bit, involving taking things out and throwing them away. Unfortunately, he did not speculate how the living wills might be used. That is a great shame. Although we do not need speculation, we need more substantial detail of how they might be used, what they might look like and how they will be judged.
The question of how they will be judged touches on the amendment as well. Subsection (5) of proposed new section 139B says that the plans must be satisfactory, but we never understand what satisfactory is or how it will be judged. We know whose opinion will be taken into account in judging whether a plan is satisfactory, but there are no rules or benchmarks. There is nothing that one would expect of a corporate entity in terms of measuring what is done.
Despite everything that has happened, it is slightly naive to believe that companies do not undertake their own risk modelling. Indeed, the FSA already requires some contingency planning. We need to understand the difference between what companies already do and the FSA already requires and what the Bill will deliver. To use another phrase that has come out throughout debates on the Bill, I am trying to tease out what additionality the Bill will bring. In relation to the break-up of banks and other financial institutions, that may well be the best solution, but emphasising that with an amendment to the Bill skews it the wrong way.
We also need to recognise that corporate structures are not static. Companies are always evolving their structures for different commercial reasons. A lot of emphasis has been put on the structure of that, for a number of reasons. I saw one thing mentioned once in a fleeting reference that was never picked up again but is incredibly important. In any corporate structuring or restructuring in the financial services sector, reputational risk is an overriding consideration. We talk openly about financial risk, but nobody has mentioned reputational risk and the idea of protecting it.
Any suggestion of insider trading is an easy way to trash ones reputation. In the recent case of the Australian Securities and Investments Commission v. Citigroup, we saw how the idea of insider trading is being taken to an extreme. Citigroup acted for one company in a takeover battle for another company. There were Chinese walls between the two teams on the takeover and the proprietary trading team at Citigroup, which wanted to trade in the shares of the company being acquired. The issue that raged at that time was whether a general aside between two members of the same firm was sufficient to indicate that the banks subsequent sale of the shares on its own behalf was evidence of insider trading.
I do not want to blow the issue out of proportion, but it is important; it is one of the issues that is taken into account in putting together or changing a corporate structure and one of the complex issues mentioned by my hon. Friend the Member for Fareham that need to be taken into account.
The logistics need to be explored in further detail. The Institute of Chartered Accountants has made much of the logistical problem of gathering information and undertaking analysis and of whether the plans will be updated periodically or whether they will be rolling plans, which is what I suspect many of them will turn out to be, because situations change frequently in the light of new acquisitions and the addition of new businesses.
The hon. Member for South-East Cornwall, who speaks for the Liberal Democrats, said that we must ensure that we do not reduce the financial services sector to the lowest common denominator. We do not want uniform business models, which increase risk because there is only one model operating in the market. That forces out innovation, and that is not in the interests of the consumer, the taxpayer or the economy as a whole.
Through living wills, we are trying to model stressed situations. I put that in the plural because people will need to model not just a single stressed situation, but a variety of stressed situations. Those situations may have very different outcomes; some may require the break-up of the bank or parts of it, while others may not. We need to be careful about how we approach the issue so that we achieve proportionality and identity problems and what we are doing to solve them. That would be made clearer if there was far more in the clause about what we are trying to achieve and how we will go about it.
The cost of the proposals is relevant and has been mentioned several times. There is no costing in the impact assessment and, therefore, no comparison of the cost here and in other countries. I am quite surprised by that because banks are already required to provide contingency plans and they already do a lot of their own modelling. It would not have been beyond the wit of the Treasury to have come up with a range of costs, because it loves ranges. The impact assessment for the next clause, on short selling, includes a range of benefits that starts at £106 million and goes up to £1,066 million. The Treasury loves ranges, so it could surely have come up with a range to give some indication of the costs in this case. That is yet another example of how providing only a framework, and a loose framework at that, leads to people asking more questions, rather than moving us towards a regime that leads to a resolution.
The hon. Member for Wolverhampton, South-West is right that the future will hold more banking crises. I cannot remember the exact figure, but the International Monetary Fund produced an assessment early in the last decade pointing out that there were well over 50 banking crisesI think that the figure was nearer 70in the last 30 years of the last century. Those crises all followed a similar pattern to the recent crisis, and we need to ask more generallynot just in this Committeewhy that was not spotted and why the lessons were not learned from previous crises. If living wills help in the future that will be great, but there is such imprecision in the clause that I am not sure that it adds much to our understanding of how they will work in practice.

Ian Pearson: Before I reply to the debate on clause 12 and the amendment tabled by my hon. Friend the Member for Wolverhampton, South-West, I would like to expand briefly on my earlier comments about the difference between the FSAs current code and the general rules that the Bill requires it to make in respect of remuneration. As I said to the hon. Member for Fareham, the current FSA code is part of the FSA rulebook. However, it is not the case that any breach of an FSA rule on remuneration will automatically make a contract void. Breach of a rule will have that effect only if the rule itself provides for that. The present code does not do that, and will need to be supplemented by new rules to be made by the FSA under the authority provided in the Bill, setting out specific prohibitions and expressly stating that contravention of the provisions will make a contract void. I hope that that clarifies any confusion that might have arisen.
At the outset of his contribution, my hon. Friend the Member for Wolverhampton, South-West said that the too big to fail issue was being ignored by politicians. I do not believe that to be true as there has been substantial discussion in the UK and internationally. However, there could perhaps be more debate, and my hon. Friend has certainly provided us with the opportunity to do that this morning.
I shall make a few broader comments on clause 12, before responding specifically to the amendment. I shall also pick up on some of the comments made by the hon. Member for South-East Cornwall. I agree that Glass-Steagall-type provisions that date back to the 1930s are not likely to be relevant, even if they are beefed up, as he suggested, for todays circumstances. There is no easy or simple distinction between what is sometimes called utility banking and investment banking, and sometimes pejoratively referred to as casino banking. Experience of the past two or more years has shown that firms that stay close to their knitting would not be regarded as performing a utility function, and could get into trouble just as investment banks got into trouble. It is well known that the Government do not believe that the case has been made for a Glass-Steagall split between retail and investment banking activities.

Colin Breed: I entirely agree with the Minister. With separation, we need to understand that the banks that were not in the casino sometimes had access to it. Northern Rock was clearly a mortgage bank, but it funded itself by having access to the casino-type aspects, which was the real problem. It is not only large banks that clearly do boththe funding of banking generally has fundamentally changed and includes this aspect of funding, which is difficult to reverse.

Ian Pearson: The hon. Gentleman makes a valid point. The issue of being too big to fail is of central importance, and I argue strongly that one of the ways in which the Government are responding is through clause 12 and the proposals on recovery and resolution plans, which are sometimes referred to as living wills.
The clause sets out the consultation arrangements between the UK authorities in relation to recovery and resolution plans, provides the FSA with additional enforcement powers relating to the collection of information and requires the FSA to have regard to international developments in making rules for recovery and resolution plans. The point about having regard to international developments explicitly recognises some of the concerns raised by the CBI and others. I will say more about that in a moment.
We made it clear in our White Paper, Reforming Financial Markets, that our strategy for dealing with the systemic risk posed by the potential failure of individual financial firms includes a number of strands such as improved market discipline, enhanced prudential regulation and supervision and strengthened market infrastructure. Another key element, which is relevant, is the focus on stronger recovery and resolution arrangements to reduce the likelihood and impact of banks failure. Of course, the Banking Act 2009 has already extended significantly the resolution tools available to the authorities, principally in relation to banks and building societies, and firms preparation and maintenance of RRPs is intended to build on that more generally.
We see recovery and resolution plans as a key tool for institutions and authorities to mitigate the systemic risk posed by firms and promote long-term financial stability. As a key new part of the supervisory toolkit, RRPs will create regulatory incentives for firms to avoid being systemically risky, because the quality of a firms recovery and resolution plan should have a direct bearing on supervisors overall assessment of the prudential risk posed by the firm. In short, if a firms recovery plan or resolution plan is not good enough, there will be regulatory consequences. The Government and the FSA are clear that recovery and resolution plans and tougher prudential requirements are key elements of a comprehensive policy to deal with the risk to financial stability posed by firms.
Perhaps even more fundamentally, we see RRPs as an important means of reducing the moral hazard arising where firms are perceived as too big to fail and benefit from an implied safety net of public support. We want firms, no matter how big or complex they are, to face up to the potential reality of their failure. Recovery plans will require them to have realistic plans in place for coping with stressed circumstances, and resolution plans will enable the authorities to prepare for the use of their resolution toolkit if recovery is not possible.
Of course, the FSA already has discretion to make general rules on such matters, which will be further underpinned by its new financial stability objective in clause 5. However, clause 12 places an express duty on the FSA to make rules relating to recovery and resolution plans, exemplifying our strong commitment to taking forward the measures.
By setting out in legislation that such rules must cover the firms subject to part 1 of the Banking Act 2009banks and building societieswe are prioritising the types of firm that have needed most taxpayer support in the past and whose failure has impacted on depositors and on financial stability most severely. The fact that the duty covers all banks and building societies recognises, as demonstrated by events here in the UK during the crisis, that smaller firms can also have a significant impact on national financial stability and that their resolution can present its own difficulties.

John Howell: The Minister will be aware of the Building Societies Associations argument that many building societies are small. The BSA questions the proportionality of the measure for such firms. Does he agree that it would be much better to discuss the matter with a cost-benefit analysis covering them?

Ian Pearson: I will say something about that in a moment, but I wanted to address the wider issue of scope.
We anticipate that the scope of recovery and resolution plans will be expanded to other types of firm. The Government intend to make an order setting out the timetable after consulting with the Financial Services Authority. By taking that approach, we are enabling the FSA to comply with the duty to make rules in a risk-based and proportionate manner. I will say something more on that in a moment.
The Bills provisions do not prescribe the content of recovery and resolution plans. That will be set out in rules, which the FSA will draft based on the evidence gathered from its ongoing pilot project and taking into account the ongoing international work. In response to the point raised by the hon. Member for Fareham, I do not think that it would be appropriate to disclose who is taking part in the pilot project. However, I can say to him that there is a sample of banks, and we expect the outcomes of the pilot work to be known by the third quarter of 2010.
The pilot will contribute to addressing some of the wider policy considerations on the cost of recovery and resolution plansthat point was raised by the hon. Member for Henleyand their potential impact on firms business models and profitability, and deal with questions on restructuring. Before making the rules, the FSA will be obliged to consult and publish a full cost-benefit analysis in the normal way. I hope that that reassures the hon. Gentleman.
In this context, I stress that while we are clear that there will be some cost to firms from the preparation and maintenance of such plans, there can be no doubt that, following the events of the last 18 months, firms, particularly those that are systemically significant, must bear a fair share of the cost of increased financial stability, which will include the cost of preparing recovery and resolution plans.
I also want to say a little more about the international dimension. We all understand that our financial services industry operates in a global and inter-connected environment. That is why the Bill explicitly states that in making its rules on recovery and resolution plans the FSA must have regard to international developments in that area. There is a growing international consensus that such plansbe they called recovery and resolution plans, living wills, wind-down plans or even funeral plans, as I have heard in some casesare a vital tool in dealing with the systemic risk posed by firms, not least large, complex, cross-border firms. The G20s communiquĂ(c) on 7 November explicitly called for
the rapid development of internationally consistent, firm-specific recovery and resolution plans and tools by end-2010.
The work that we are doing in the UK, through the legislation that we are discussing today, needs to be seen in that context.
Through the pilot programme and our close work in international forums such as the Financial Stability Board, we are taking a leading international role. We want to ensure that the financial services sector in the UK is stable and can fulfil its role of supporting the real economy, which is why we have been leading that ambitious pilot programme that will support and inform our own domestic legislation and European and international work streams in that area. I take the point that has been made by the CBI and others that it needs to be seen in an international context. I believe that the Bill makes explicit reference to allow that to happen, and it is certainly our policy intention that that should be the case.

Mark Hoban: If by the time we get to the end of 2010 there is no international consensus about living wills and detailed guidance drawn up at a global level, does the Minister believe that the benefits of living wills are suchin terms of the stability that it brings to the UKthat it would be worth proceeding with a variant of those in the absence of an international consensus?

Ian Pearson: I do not believe that there will be an absence of an international consensus. Indeed, at a higher level, agreement has already been reached on the usefulness of such tools. What needs to go on now are more detailed discussions about the content of recovery and resolution plans. That is the task for the next few months. Our pilot work is really feeding into the international discussions that will take place on the matter. As was said in the communiquĂ(c), we need some internationally consistent approaches to the implementation of the plans in the future, but I do not anticipate problems in getting a significant level of international agreement that such things are necessary for financial stability and should be introduced.
With regard to the amendment tabled by my hon. Friend the Member for Wolverhampton, South-West, I certainly understand his intention behind it. I do not support the idea of breaking up by a certain deadline. The amendment is not necessary and I shall set out briefly the reasons why. We are not legislating for additional powers for the FSA to force firms to restructure their operations as a result of their recovery and resolution plans. My hon. Friend will be aware that the FSA already has plans, as part of its toolkit of disciplinary measures, to require firm restructuring. The Bill obliges the FSA to take appropriate action if it considers that a recovery or resolution plan fails to make satisfactory provision. The FSA can apply the whole range of its current set of tools, including disciplinary measures, when it considers that a recovery or a resolution plan is inadequate. It can use those tools to achieve significant changes in an authorised firm, which could include structural changes.
The tools at the FSAs disposal include offsetting measures, such as discretionary capital add-ons or so-called own initiative variation of permission powers, which ultimately can include the withdrawal of part IV permissions. The FSA therefore already has powers that may achieve structural changes. My hon. Friend will also be aware of the international debate on whether additional new powers would be necessary and desirable, and what would be the appropriate body to exercise them. Its pilot work will again be helpful in that regard, as will the progress that is taking place on the international template that has been developed by the Financial Stability Board. We should not be proceeding ahead of clear evidence and international agreement with regard to additional new powers, which could have significant implications for the competitiveness of the UK. It is important that we continue to lead and participate in the international debate about what additional powers might be required for the future. The amendment is not necessary or desirable at this stage, and I hope that I have convinced my hon. Friend of that.

Rob Marris: This has been an interesting debate. We have heard some thoughtful speeches and the discussion has been of a higher level than took place earlier on some of the minutiae. Two main themes have come through, one of which was the international dimension of the size of major banks and so on. The other was the complexity of the structures of many such institutions, with different models not a shared model. Indeed, as the hon. Member for South-East Cornwall said, most people cannot understand the structure of some banks.
I certainly agree that there is a strong international dimension. I take my hat off to the Government for making, through clause 12, the resolution and recovery plans part of the armoury of defence for us in the United Kingdom, and for introducing and discussing them at an international level. I am glad that more international debate is going on than I had realised and, from what my hon. Friend the Minister said, more domestic debate. If banks go down again, they could bring us all down with them because we cannot afford to bail them out, and the evidence is that what I regard as a pretty important issue is not getting through a whole lot to the average politician.
On the recovery and resolution plan, the Minister says that in a sense we do not want to get ahead of ourselves on international discussions. I say to my hon. Friend the Minister, What if those international discussions lead to a position where internationally they are saying that there should be such powers to break up very large financial institutions? I suspect that the United States might come to that conclusion. They have already started to do that in some ways in terms of breakdown. My amendment is only permissive.
I get a sense from some of this debate that the recovery and resolution plans in clause 12, which I seek to amend, have an echo of sitting on the Titanic debating how many lifeboats we have, whether the staff are trained in putting people into lifeboats and how good the lookouts are, rather than the fact that the Titanic is a bit too big and should not be putting to sea at all. Despite the assurances about the level of domestic and international debates, I am concerned that we could get into a situation, which has happened before, and it happens to people in their personal lives and in the body politic, that when the pain goes away we do not go to the doctorparticularly true of men, of courseand when things calm down, we collectively take our eye off the ball, both domestically and internationally. I therefore I urge the Treasury to keep its eye on the ball, even with things quietening down.
I am heartened by the fact that the Minister intimated that the FSAs existing powers could lead to a requirement by the FSA for a financial institution to undertake structural changes, and I take such changes to include in certain extreme circumstances the breaking up of that institution. On that basis, and with that reassurance from the Minister, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 12 ordered to stand part of the Bill.

Clause 13

Power of FSA to prohibit, or require disclosure of, short selling

Question proposed, That the clause stand part of the Bill.

Mark Hoban: I do not want to say a huge amount about the clause. There was some discussion at the evidence sessions about whether the clause was needed, because similar paths had been taken by the FSA during the financial crisis to tackle some of the issues relating to short selling of certain banks shares. It was argued that the FSA took action under its market abuse powers and that that was not appropriate. Indeed, the British Bankers Association said:
Our members consider that it is inappropriate that the FSAs current rules on the emergency restriction of short selling sit within the market abuse rules of the FSA handbook. Rather, it would be better for them to be moved to the disclosure rules. The placement of generalised rules on short selling into the market abuse rules wrongly associates all forms of short selling with abuse.
The CBI echoes that. It says:
The previous temporary measures adopted by the FSA in respect of short selling were taken under the market abuse regime partly because the FSA believed it had no other power to act.
We welcome the fact that it is now put on a formal basis, although it still sits within the part of the Financial Services and Markets Act 2000 that relates to market abuse. It has not gone all the way in tackling the concern that the BBA has.
The Minister has defended short selling on a number of occasions on the Floor of the Houseonce in response to a question by my hon. Friend the Member for Macclesfield (Sir Nicholas Winterton). The Minister is a very clear opponent of that form of trading in markets. Of course, it can give rise to a number of issues. The impact assessment characterises the problems with short selling. It can lead to three aspects of market failure: market abuse, disorderly markets potentially leading to a depositor run, and transparency deficiencies. It was around the issue of disorderly markets that such changes were largely introduced.
We do not, therefore, have an issue with the introduction of part 8A, but I do want to raise a question about the wording of proposed new section 131B(1). My assumption is that the Government are seeking to prevent the short selling of certain financial instruments, such as the shares of Barclays bank, HSBC or the Royal Bank of Scotland. However, it is not entirely clear from subsection (1) whether that is the full limit of their ambitions, because it states:
The Authority may make rules prohibiting in specified cases persons from engaging in short selling.
I am not sure whether that means that the Government would like to stop an institution short selling. They might tell a particular hedge fund or investment manager to stop short selling, rather than saying that they want to stop the short selling of a particular financial instrument. Will the Minister clarify that, because it would seem odd for the rules to focus on stopping one institution from engaging in short selling rather than applying across the market? If that is the Governments intention, they could use powers elsewhere in the Bill instead. I would be grateful for some clarity on that aspect of the rules from the Minister.

John Howell: I have three issues on the clause. The first is the definition, the second is the clarity of the proposals and the third is the relationship with the international regime.
There has not been a legal definition of short selling to date, so the Bill sets a precedent. The Committee will recall the evidence session at which Simon Gleeson of Clifford Chance said that the Bill provides
a basis for banning selling. The definition of short selling, as set out in the legislation, is any transaction in which someone might benefit if the value subsequently goes down.[Official Report, Financial Services Public Bill Committee, 10 December 2009; c. 105.]
It was commented that the proposals were more akin to banning selling than short selling. That witness session revealed a wish for a more thoughtful definition. There was an acknowledgement that it was difficult to define short selling. The lawyers offered us the opportunity to have a paper providing more evidence regarding what a definition might look like. I am not sure whether anything has yet emerged, but it would be useful to pursue it, because there is concern that, by common consent, the definition in the Bill still needs to be fleshed out. My question, therefore, is how the definition will be taken forward, given the concern about it among such distinguished lawyers.
On the clarity of the proposals, the clause proposes two thingsemergency powers to stop short selling, which is largely separate from abuse, although linked to it, and a disclosure regime. To look first at the stopping part of the proposals, my hon. Friend the Member for Fareham made a valid point, which was also made by the British Bankers Association, when he asked what the purpose of the proposals is. Is it to allow the FSA to suspend trading and stop activity in a certain instrument or is it to stop certain firms from undertaking such activity?
The FSA accepts that regulatory intervention is justified where there are identified market failures and it is expected to deliver net benefits to the market, and I see no disagreement about that. However, that means that we needthe CBI has called for thisto know more about the circumstances in which the provisions will be used and how they will be used, given that the Bill is aimed principally not at abuse, but at disorderly markets and transparency deficiencies. It is relevant to link that to the assessment in the discussion paper that the FSA produced on the issue almost a year ago. That paper looked at six options, of which the stopping of the selling only when there was an urgent need was the one that eventually came through into the Bill. However, the circumstances need to be better defined because they were not well defined in the document. Will the Minister comment on the balance that we need between recognising the benefits of short sellingan increased number of sellers, improved liquidity, increasing trade volumes and reducing the transaction costs and overall improvements in efficiencyand the specific problems that occur in disorderly markets where there is an excess of volatility that can lead to contagion.
The FSA document also pointed out that emergency measures themselves may lead to additional volatility just because they have had to be taken and brought into use. Therefore, something about the circumstances that justify the imposition of this measure would help.
Let me repeat again that the FSA accepts that regulatory intervention is justified when there are identified market failures and when it is expected to deliver net benefits to the market. Paragraph 3.17 states:
It is not clear whether a lack of transparency about the level of short-selling and the identity of short sellers gave rise to a material market failure. Further there is the question whether the benefits of any mandatory disclosure requirements exceed the cost.
However, what evidence is there that disclosure will be useful in normal market situations and will improve stability in volatile times? The FSA document is principally considering market abuse, but we need to extend beyond that. A process needs to take place in relation to the costs involved. I did not mean to be entirely glowing about the range of benefits that is put in here. A process seems to be under way of bringing the number down. I was struck by the way in which the impact assessment does not take into account opportunity costs because they were unable to be quantified. They may be unable to be quantified, but they are certainly not equal to zero, so a process needs to take place in relation to that.
Another issue that I wanted to raise was the relationship with the international regime. The Treasury has already admitted that the UK currently has a wider definition of market views that many of its European counterparts. Paragraph 5.2 of the FSA documents states:
We know that market participants have encountered problems and significant costs in having to comply with the variety of different regimes introduced in the relevant jurisdictions.
There have also been calls for the regime to be applied as widely as possible internationally. In February, the International Organization of Securities Commission and the Committee of European Securities Regulators had working parties on short selling with the aim of trying to produce a draft law by the end of 2009. It will be good to have an update on that. The issue is not consistent across the European Union. David Ereira in his evidence session said that no assurances could be given that what is being proposed in this clause will dovetail into the EU, and that the UK was jumping the gun. He said:
It will probably work out all right, because the wording is sufficiently wide that in all probability we will be able to come up with appropriate regulations that fit within whatever comes out of the international processes. It just seems to me more appropriate to wait and see what comes out of those international processes.[Official Report, Financial Services Public Bill Committee, 12 January 2010; c. 110, Q48.]
If we look at how prominent members of the European Union have dealt with the issue over the past few months, we get a varied pattern. Austria saw it as abuse and linked it to market manipulation and insider trading. Belgium linked it to good order, integrity and transparency and introduced rules that are restrictions on the vending of shares. The Czech Republic took no action. Denmarks ban applies to short selling in financial companies. Finland went for more supervision. France aimed at short selling of financial sector securities and Germany principally banned naked short selling of specific financial institutions. That is a hugely disparate approach, and one can completely understand where the lawyers who spoke in the evidence-taking sessions were coming from when trying to get to grips with the difficulties that companies face with this, and the need for consistency. I hope that the Minister will provide some clarification on those issues.

Ian Pearson: Indeed I will. Let me set out the purpose and thinking behind the clause before addressing the comments made by the hon. Members for Henley and for Fareham. In clause 13, we are trying to give the FSA the power to control all forms of short selling that might threaten financial stability in the future. As has been demonstrated, the FSA already has the power to control short selling, but under its existing powers it can do that only when it considers that short selling amounts to market abuse. Certain short selling activitieswhich legally cannot and should not be characterised as market abusemight nevertheless give rise to disorderly markets and create risks to financial stability. That is why new part 8A gives the FSA the power to control short selling, so as to protect the stability of the financial system and maintain confidence in it.
Responses to our public consultation showed overwhelming support for allowing the FSA to place clear and independent restrictions on short selling, and to require the disclosure of short selling. Under certain circumstances, the FSA would be able to ban short selling in certain financial instruments, such as shares in a particular bank. In response to the hon. Member for Fareham, let me take the opportunity to clarify that the powers would not enable the FSA to ban an individual firm from short selling a stock when another firm was able to continue doing so.
The FSA expects to use the power to prohibit short selling infrequently. As is known, it last used this power in a time of extreme market turbulence when there was high and prolonged price volatility and downward pressure on the price of financial stocks. By giving clear, separate, independent powers in legislation other than that relating solely to market abuse, we give clarity to firms about the scope of the FSAs powers, and why it has those powersagain, I emphasise that it is to protect the stability of the financial system and to maintain confidence in that system.
The FSA will have the power to fine or censure persons who breach short selling rules. That extends to all people who engage in short selling, including those who are not authorised persons under FSMA. Allied to that, the FSA will be able to require the production of information and documents from a personor persons connected to a personsuspect of having contravened those rules. These are straightforward enforcement powers, and it is not unusual for such powers to extend to unauthorised persons in that way, as is the case with the market abuse regime.
The hon. Gentleman made the point that we are putting short selling powers in the market abuse rules section. I have said this already: we are introducing a new part 8A. Although it will follow part 8 of FSMA, which contains provisions on market abuse, it is entirely separate from it. The new powers given in part 8A will not be dependent on provisions in part 8; part 8A is located after it, but it is entirely separate. Without being too controversial, let me draw an analogy with the measure that allowed us to take action against Iceland. That featured in a Bill with a long title that included the word terrorism, even though the actions we took were about protecting consumers. I shall not speak any further on that matter.
The hon. Member for Henley said that there was no proper definition of short selling, and went on to give a number of international examples of where other countries have taken action on short selling. We pretty much know what we mean when we talk about short selling, but the FSA will obviously consult on the definition that is to be included in its rules.
On the point that the hon. Member for Henley made about disclosure, there is a global regulatory consensus that requiring disclosure on short positions is a good thing and will help reduce the potential for abusive behaviour and disorderly markets, so it is important to implement it. He also asked about the relationship to EU rules. The powers given to the FSA in the Bill will enable it to implement any new EU rules on the matter.
It is not possible to specify in detail what future circumstances might require the introduction of an emergency ban. It is essential not to fetter the FSAs discretion to take action in conditions that might require swift intervention. However, when using the proposed emergency powers, the FSA would need to be satisfied that its rules were necessary to maintain confidence in or protect the stability of the UK financial system. For example, if short selling threatened to destabilise an institution or institutions whose failure could have systemic effects, or if short selling were otherwise leading to a widespread loss of market confidence, it would be appropriate for the FSA to act.
The clause is important. It has been helpful to have this stand part debate in order to put certain matters on the record. I commend the clause to the Committee.

Question put and agreed to.

Clause 13 accordingly ordered to stand part of the Bill.

Clause 18

Collective proceedings orders

Mark Hoban: I beg to move amendment 58, in schedule 9, page 192, leave out line 10 and insert
Select Committee for Children, Schools and Families of the House of Commons..
As this is the first clause of many dealing with collective proceedings, with your agreement, Mr. Gale, I will preface my remarks with some general comments about collective proceedings to save the need for a separate stand part debate. The amendment flows explicitly from the argument that I will make about the clause.
The genesis of this clause and subsequent clauses on collective proceedings lies in a report produced by the Civil Justice Council, a body that advises the Lord Chancellor. The report, entitled Improving Access to Justice through Collective Actions, was published in December 2008. It was the product of a long process of discussion and consultation within the legal community. If you are minded to read it, Mr. Gale, you will see that the report runs to about 550 pages, so it is not an inconsequential document. It sets out some of the benefits of collective proceedings. They are worth rehearsing as a backdrop to this debate.
The report states:
Existing collective actions are effective in part, but could be improved considerably to promote better enforcement of citizens rights, whilst protecting defendants from nonmeritorious litigation...Effective collective actions promote competition and market efficiency, consistent with the Governments economic principles and objectives, benefiting individual citizens, businesses and society as a whole...Collective claims can benefit defendants in resolving disputes more economically and efficiently, with greater conclusive certainty than can arise through unitary claims...The Court is the most appropriate body to ensure that any new collective procedure is fairly balanced as between claimants and defendants, the latter of which should be properly protected from unmeritorious, vexatious or spurious claims as well as from so-called blackmail claims.
The reports findings conclude with the recommendation:
There should be no presumption as to whether collective claims should be brought on an opt-in or opt-out basis.
I will refer explicitly to that issue during debate on clause 19, which gives the basis for opt-in or opt-out proceedings, a subject of some controversy among various bodies.
The Civil Justice Councils report set out the basis for that. However, I want to raise one issue. The Ministry of Justice, in responding to the report, said that it did not see any merit in a general application of collective proceedings but that proceedings should go ahead on a sector-by-sector basis. So why is the financial services sector an appropriate one for the introduction of what is a relatively novel procedure in UK law, notwithstanding the existence of group litigation orders?
I want to deal with three general questions. First, as I have said, why is collective action needed in the financial services sector? Secondly, is there an alternative to legal action? Thirdly, if we believe that collective proceedings are the right course of action, are there appropriate procedural safeguards to balance the interests of defendants and claimants?
Why is collective action needed? The explanatory note to clause 18, which is phenomenally brief given the nature of the clauses subject matter, says:
This clause provides that the court can authorise collective proceedings to be brought on behalf of a group of financial services claims that share the same, similar or related issues of fact or law.
We can think relatively easily of issues in the financial sector that fall into that category, such as mortgage endowment mis-selling and the sale of payment protection insurance. One could also argue that Equitable Life is another example of the type of case that might warrant a collective proceedings order.
Such cases have a common thread; they are not isolated examples. The Civil Justice Council talked about the benefit of bringing these claims collectively, ensuring a more conclusive outcome than where a unitary claim is brought. So we could aggregate these cases, rather than deal with them on case by case. That would give greater consistency and it would result in a speedier response.
A timely example is the bank charges case that was recently heard in the Supreme Court. In parallel with that case, although there was a stay in hearing individual cases, a large number of people were bringing cases through county courts or small claims courts against banks, because of unfair bank charges. The reason why the test case ended up in the Supreme Court was that it was easier to deal with those issues on a collective basis rather than on a case-by-case basis, although there would have been a read-across between the Supreme Court case and resolving the historic claims if the matters had gone in the OFTs favour.
Clearly there are cases with a common thread which one could see falling within a collective proceedings order, but I suppose that my question is not so much about whether any cases will benefit from this process, as about what it says about the strength of our regulatory system if we feel that legal action is the right step to take. For me, that is the most difficult issue to address, because we are talking about introducing collective proceedings orders in a heavily regulated sector. The FSA rulebook governs the activities of the people who will be defendants in these cases. We already have an alternative disputes resolution procedure in placethe Financial Ombudsman Service. Although the remit of the FOS is to cover individual cases, it has almost filled a vacuum in the current regulatory structure, in that it has also dealt with a series of claims in particular areas. So it was the FOS that dealt with the fallout from mortgage endowment mis-selling, for example; it has dealt with all the cases that have arisen because of that mis-selling.
It strikes me that we are looking at a relatively novel legal process, when there should be a mechanism in the regulatory structure that consumers can rely on, without having to have recourse to the law. In the evidence session, Peter Vicary-Smith said:
It is certainly the case that the regulator is not doing its job, as we can see from the evidence on payment protection insurance and the persistent mis-selling and lack of action. It created a situation where the Financial Ombudsman Service was overwhelmed by claims, of which some 89 per cent., I think, have been upheld. It is undoubtedly the case that there are problems.[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 50, Q140.]
What we do not see is the reform to the FSA that allow consumers to say that a proper regulatory mechanism is in place. In debating clause 26, I think that we will talk about the consumer redress route that the Bill also introduces, but the Government need to make a much clearer argument about why this particular route has been chosen, given that a regulatory structure is in place to protect the interest of customers of financial services.
Is there not a reform in the structure of regulation or the powers of the FSA that would render the proposals unnecessary? The Ministry of Justices response to the Civil Justice Council report states:
Rights of action should be introduced only where there is evidence of need and following an assessment of economic and other impacts and consideration of alternative approaches. In particular, regulatory options should be considered before introducing court based options.
I do not think that the Government have made that caseit is not apparent from last years White Paper or the explanatory notes. I hope that the Minister will take the opportunity to explain why this route is preferred and why other regulatory options are not available.
The CBI said in its briefing to the Committee that it believed that
priority should be to ensure that current regulation does its job, and then greater emphasis placed on other, more effective forms of redress such as alternative dispute resolution.
To use the Ministers favourite Titanic metaphor, perhaps we should focus more on prevention than on cure, and think about what we should do to avoid sailing into the iceberg in the first place, rather than on what is going to happen on deck when the ship hits the iceberg. Some consideration should be given to what the regulators are failing to do at the moment that makes the provisions necessary.

Rob Marris: It was I who used the Titanic metaphor. To carry on with that, part of clause 18, without the amendments, is in a sense an attempt to stop or try to dissuade the ship from leaving port in the first place. If a financial institution knows that there could be a collective action, it may be dissuaded from engaging on a course of action that is somewhat risky.

Mark Hoban: I am sorry for wrongly attributing the metaphors; we have been awash with metaphors this morning, so we should perhaps move away from talking metaphorically about the issue.
The hon. Gentleman makes an important point. If this were an unregulated sector, his argument would be powerful, because there would clearly be a deterrent. However, there are already a number of measures in place that should provide protection for consumersthere is an FSA rulebook and rules on the conduct of businessand we should not need the clause to act as a deterrent. I am seeing it very much as a clause that facilitates an outcome when something has gone wrong, but the expectation should be that the FSA is dealing with situations as they arise. Some might argue the problem is that the FSA rules are predominantly about the conduct of business rather than the products. From what we have here, it seems that products have given rise to a problem, given that the FSA is looking at product regulation in particular. It has looked at it most recently in the context of mortgages.
The regulator should be aware that there is a problem. Such problems do not suddenly emerge out of nowhere. Payment protection insurance was a problem that built up over time, so there should have been a regulatory response as it was building up rather than a resort to law. Concerns have been expressed about the matter and the analogy drawn by several commentators is that it is equivalent to US class actions. The British Bankers Association responded by saying:
We are very concerned that proposals on class actions risk introducing a US-style litigation culture to the UK. The US system is opt-out and has led to incentives for baseless claims, increased costs (ultimately born by consumers) and a situation where the only real winners are lawyers. The BBA urges that any proposals based on an opt out approach should be dropped and instead that the focus of the bill is on creating a more effective system of consumer redress via the FSA and subject to court approval.
We shall talk about that structure later, but its remarks echo the concerns of the Civil Justice Council, which said that
The Court is the most appropriate body to ensure that any new collective procedure is fairly balanced as between claimants and defendants, the latter of which should be properly protected from unmeritorious, vexatious or spurious claims as well as from so called blackmail claims.
It is not only partially an industry point; it is reflected by the considerations that underpinned the report of the Civil Justice Council.
As I said, there has been a significant debate about the measures. Consumer groups, such as Which?, Citizens Advice, Consumer Focus and Help the Aged have written a joint opinion on the provisions. They stated:
We believe that the provisions in the Bill are an entirely proportionate response to tackle the types of mis-selling issues that have arisen in the financial services industry. By giving the court the power to decide whether a collective action would be opt-in or opt-out as required by the circumstances of the case, they strike the balance between ensuring an opt-out process where necessary but providing judicial supervision to prevent vexatious and unmeritorious cases.
Consumer groups recognise the merits of collective action, but also some of the risks of that, which is why I want to move on to the need for safeguards. A great deal of the work of the Civil Justice Council was about some of the safeguards that are needed.
I want to conclude on the second theme. We also need to deal with the problem with the regulatory system. The regulatory system should deal with such issues and, given that the financial services sector is so heavily regulated, we should not have to depend on individuals enforcing their rights to achieve the right outcome for consumers.
Are there necessary safeguards? The safeguards are the measures set out in the Bill, in secondary legislation and under the rules of the court. The explanatory notes to the clause state:
Regulations or rules of the court may require the court, when considering whether to authorise the bringing of collective proceedings, to consider matters set out in the regulations or rules.
Our job in Committee is to debate such issues thoroughly. We should all be able to agree that we do not want a situation in which the only real winners are lawyers. We are not aiming for that. We must therefore make sure that there are adequate safeguards in respect of the judicial option on opt-out proceedings.
The point that we have reached in our thinking is that we must make sure that adequate safeguards are in place in the Bill if we are to go ahead. In its submission to the Committee, the Prudential wrote:
We agree with the Government that collective proceedings should be used rarely and only for the most significant cases. However, we do not believe that the Bill, as drafted, provides sufficient checks and balances to ensure the system is not abused.
On a similar point, much of the detail will be filled in by secondary legislation, which has yet to be published in draft, and court rulings. We expected to have more of the detail by now, as the European Justice Forum, which does not speak for the financial sector, intimated in its response. It says:
EJF is particularly concerned that the Bill would introduce opt-out class actions in the financial sector and thatcontrary to government policy stated in July 2009, no framework of rules and safeguards has been produced prior to proposing such a remedy.
The plan to produce a framework document was set out in the Ministry of Justice response to the original paper by the Civil Justice Council. What stage has that document reached?
My comments on amendments to later clauses will be about ensuring that sufficient safeguards are in place. The amendments that I have tabled are an attempt to ensure that the safeguards in the Civil Justice Council paper are reflected in the Bill not only so that we have a framework for collective proceedings but so that rights and safeguards are in place before the process comes into force.
Subsection (5) states:
A person may be authorised under subsection (1) to bring proceedings even if the person would not otherwise be regarded as having any interest, or any sufficient interest, in the proceedings.
That is quite a broad provision. In effect, anyone bringing a claim does not need to have bought a payment protection insurance policy or to have been mis-sold an endowment policy. Such a person could act as a representative of claimants. In a recent case in which a group litigation order was used, the Consumers Associationnow Which?acted as a representative. It was not a financial services case; it involved a price-fixing cartel for football shirts. In that case, it was not an individual customer who bought a football shirt, but Which? that acted as a representative.
One can see why Which?, as a consumer group, would have an interest in acting on behalf of consumers, but other groups could equally act as a representative, given the breadth of subsection (5). We are well aware of the activities of claims management companies. Some clearly act in the interests of potential claimants, but one gets the sense from time to time that others are looking for a cause to fight and see a clear commercial benefit to doing so in terms of the fees that they might generate.
So there needs to be some control over who can bring such cases. Subsection (5) is broadly drafted, and amendment 58 would introduce an additional check so that the representative
is authorised to act as a representative on an ad hoc basis under the civil Procedure rules, or...is authorised to act as a representative and on such terms as specified by order of the Lord Chancellor, in accordance with criteria to be published by the Lord Chancellor for the purposes of this section.
That would introduce some coherence and structure and make clear who can bring such claims and act as a representative. It would require the Lord Chancellor to consult the Lord Chief Justice or a judicial office holder nominated by the Lord Chief Justice when authorising an individual to act on an ad hoc basis or issuing criteria or guidelines for who might act as a representative.
The safeguard is set out in the Civil Justice Councils report and is, from recollection, an extract from the draft Bill that the council prepared. The amendment is the first in a series that would introduce the safeguards set out in the report and ensure that a proper framework was in place for such actions to be brought.

Roger Gale: The Committee will notice that at the top of the selection list are the words
Chairmens provisional selection and grouping of amendments.
The Chairman does not always get it right. I think I may say without wishing to be patronising that the hon. Gentleman has taken a pragmatic and sound approach to his coverage of this debate. In so doing, he has covered collective proceeding rules, which are in clause 18, and, to a considerable extent, opt-in and opt-out, which is in clause 19. The substance of clause 20 is fairly light, so I will now group the stand part debates for clauses 18, 19 and 20 with the amendment.
If that leaves the hon. Gentleman in a difficult position, Mr. Benton or I will take cognisance of that. Mr. Benton might wish to make further remarks. We are now debating amendment 58, with which it will be convenient to debate clauses 18, 19 and 20 stand part.

Rob Marris: I am surprised by the amendment, as it appears to take power away from the courts, which are independent, and give it to a politicianthe Lord Chancellorwho may or may not be elected, although the current Lord Chancellor is. That would be a retrograde step. Pursuant to the other provisions in this groupingnot only clauses 19 and 20 but clauses 21, 22 and onwardsI think that the amendment is misconceived in focusing power in the hands of a politician rather than leaving it with the courts, as clause 18 would do.

Roger Gale: Before we proceed any further, the hon. Member for Wolverhampton, South-West mentioned clauses beyond clause 20. For clarity, may I explain that I drew the line at clause 20 because separate amendments have been tabled to clause 21? It would be unwise to go any further down a tricky road.

Ian Pearson: I am considering where to begin

Roger Gale: Try clause 18.
Ian Pearson and, more importantly, where to end. I think that I will begin with clause 18, as you suggest, Mr. Gale, and amendment 58. Clause 18 is a new development in the law of the country, and it is entirely right that the hon. Member for Fareham should raise probing questions about the Governments intentions. I am happy to put a number of matters on the record in the time available this morning and, I suspect, this afternoon.
We believe that there is a clear need for collective proceedings for financial services claims. The hon. Member for Fareham referred to the Civil Justice Council report on improving consumers access to justice. It recommended that generic collective proceedings be introduced in the UK. In our response, we said that they should be considered and, where appropriate, introduced in specific sectors where there is a case for doing so. As I have said, we believe that there is a strong case for doing so in relation to financial services.
We do not believe that there is an effective means at the moment for representing consumers as a group in mass financial services cases. There is some provision for collective litigation, but it is so limited that it is rarely used.

Roger Gale: Order. I am advised that the Programming Sub-Committee will not now meet and that this Committee will sit between 8 pm and 10 pm this evening. I can take the Chair, so Mr. Benton will be with you this afternoon and I will be with you this evening. I give an undertaking to see when I leave the room whether there is any way to generate a little heat in this igloo.

The Chairman adjourned the Committee without Question put (Standing Order No. 88).

Adjourned till this day at Four oclock.